The COVID-19 pandemic, and the requirement that non-life-sustaining and/or non-essential businesses shut down, is having a material impact on the ability of many commercial tenants to perform their obligations under their leases, including payment of rent and, in turn, on landlords’ ability to pay their mortgage loans.
So what should a landlord do upon receiving a letter from a tenant asking for rent relief?
DEFER rent and/or additional rent for a specific period of time with an obligation to repay it over the following several months or years.
WAIVE the rent and/or additional rent for a specific period of time and add additional term to the lease.
RENEGOTIATE the terms of the lease.
REJECT the tenant’s request and risk the tenant going in default for failure to perform under the lease, which could ultimately result in a lawsuit.
It is recommended that a definitive period of rent deferral be established between the landlord and tenant, such as three months or when the tenant reopens for business. The landlord may consider only granting a deferral of the basic minimum rent, while requiring the tenant to continue paying operating expenses, taxes and utilities. Once the rent deferral period is over, the tenant would then be required to pay the deferred rent over a specific period of time, whether it be paid over six months, one year period, or spread over the balance of the then current term of the lease. This would allow the tenant some temporary relief while the landlord works with them in hopes of helping them survive their business and reopen in the leased premises.
Landlords can employ a variety of strategies to provide tenants with relief. The most common are discussed below.
The landlord can reduce the tenant's rent for a portion or all of the term left on the lease. The usual forms of rent reduction are to reduce the base rent, operating expenses, or both. In regard to retail, it is common to convert base rent to percentage rent.
While rent deferral provides tenants with immediate relief, it can place stress on a landlord’s cash flow and ability to meet debt service and other obligations. If rent deferral is granted, a landlord has several options to structure the “pay back” of the deferral, including adding additional months to the term, amortizing the deferred rent over the remaining term or other specified period, or requiring a balloon payback at a future date.
If a tenant is significantly past due on rent payments, a landlord may agree to forgive a certain amount of thepast due rent if the tenant remains current thereafter.
Rather than abating past due rent, a landlord may agree to convert the past due rent into a loan payable over time.The tenant would, however, continue to pay the current rent. The loan is then evidenced by a promissory note that is cross-defaulted with the lease.
Security Deposit Application
Depending on the size of the existing security deposit, in lieu of rent deferral, a landlord might agree to immediately apply the security deposit to the next rent payment due, while giving the tenant an extended period of time to replenish the security deposit. Of course, this option comes with risk: if the tenant later defaults, the landlord may be left with no security deposit to apply towards its damages.
Given the spate of government-imposed business shutdowns designed to slow the spread of COVID-19, many retailers, restaurants, dental practices and other service providers deemed “non-essential” have experienced forced closures of their business. The consequent steep decline in revenue has tenants searching for ways to conserve cash, and many are turning to their landlords to request rent relief.
Unsurprisingly, hospitality has been decimated by the national response to the pandemic. Coronavirus has led to a worldwide crisis with its effects on the hospitality industry potentially heavier than those of 9/11, SARS, and the financial crisis in 2008.The virus generates deep fear, confusion, and impacts us in a deeply emotional way that this generation has never felt. On top of this, physical confinement is aggravating the situation.
On a business level, the impacts of the crisis have reached every industry in the world, with the travel and tourism taking a massive hit. The travel restrictions on international flights have caused the global airline industry losses mounting up to $880 billion. Many hotels find themselves empty and looking to fill the once full lobbies and rooms. Nevertheless, the grave situation has given space for worldwide solidarity with many hotels around the world providing their premises to house medical staff, first responders, or hospital patients not suffering from coronavirus.
The office leasing market is likely to suffer in the short-term due to COVID-19 as layoffs diminish tenants' overall need for space and, in many cases, set aside expansion plans they may have had. In addition, tenants who remain in the market for additional space will have a difficult time touring properties.Office workers' pushback against the open office environment is likely to accelerate, as illness is more easily transmitted in an open environment. Many employers already had recognized that in a competition to attract and retain top talent, squeezing workers into increasingly tight spaces was not a sustainable strategy. Telecommuting will likely continue, but office life - in some form - will, too. The challenge lies in how to adapt workplaces.
The health and economic effects of COVID-19 on the multifamily industry, in terms of exacerbating existing problems related to the nation’s affordable housing shortage could see significant upheavals as unemployment rises.Businesses that are closed employ people who now will struggle to pay rent. It is a similar situation to retail, only in this case the tenant is an individual or family who lost its source of income. In addition, factors that contribute to housing quality and health quality, such as ventilation, plumbing, air quality, and water quality, have become even more significant with people sheltering in place during the outbreak
Industrial, meanwhile, is in a two-pronged situation similar to the retail sector. Grocery and medical items, for instance, are flying off the shelves, so properties in this supply chain are humming along. But other industrial sectors could be in store for tough times, depending on what areas of the national economy slow or stop.
No matter the type of property you own, you can count on the experts at Evanco Realty Advisors for the very best in full-service commercial administration. We provide everything you need to minimize your ownership workload and maximize the return on investment for each of your commercial properties. We provide peace of mind to owners, implement excellent property management services that enhance value for landlords.
Call us today at (619)814-1688 to see how our commercial property management strategies can help you!
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